Off The Cuff

401k Debit Cards? What Will They Think Of Next?

Posted by: From Arkansas in Credit and Financial stuff, Credit and credit cards on Mar 02 2008

There are so many things going on in the world now that I hesitate to mention this one since the concept almost seems so totally stupid. Recently, I had heard about the crunch on the homeowners because they got in over their heads when buying a house. They used a mortgage plan that also seems to be more or less ridiculous because it uses the idea that today..the interest rate is stable and really low. Tomorrow is another matter but we don’t care because today..the interest rate is really low and stable. I am absolutely sure that at the time, it seemed like a good idea. Somewhere.

And now, those same people are struggling to maintain a house payment that is taking them down financially, any way you look at it. The only cure for it is to pay the thing off with new money or find a way to refinance the thing with a fixed rate. Those sliding rates are strange puppies. They are great in low interest times but just let the rate jump a bit and you could be paying way more than you thought you would in payments. This is what happened to people going that direction.

Okay, that was a couple of years ago that those mortgages came about. Now we have a new deal that for some reason, sounds good to those who want to dig into it. You can now get a debit card for your 401k account. Sounds good because the money in there will be available immediately. Yeah. Ummm, so you decide to get out some of that money because you are in a crunch and you see no way out except for that. What happens after you get out the money? And for that matter, is the situation so dire that this is your only way? Let’s take a small look at the situation.

Say that you have a couple of months payments on your house that’s due. You are about to be foreclosed. Is this a good time to get that out? Depends. Is it going to help meaningfully? As in, is it going to just catch you up or can you get out enough to pay it off? Will it help you in the long run or is this simply a panic thing? If it’s a panic thing, sit back and really think this thing out. Because, if you take the money out you will owe it back. Are you aware of that? If you, for instance, leave your job then you will have to pay the whole thing back in a lump sum. OUCH!

The reality is that, for most people, this would be a bad time to be draining the 401k account. Sooner or later, that money has to be paid back. It’s like you loaned it to yourself. But a loan is a loan. So many people are getting into more and more debt problems because they see a fast fix and go with that instead of checking out ALL the options first.

On the other hand, if the money in that account can actually be meaningful and would help get rid of the debt, then that is a good idea. For instance, you have credit cards X, Y and Z that are all maxed out, you have several bills all coming due at once and there are several things that are so far behind that you are getting creditors calling home, overdue bills in the mail and so on. If a lump sum will fix all that, then it’s a great idea. If it’s only going to keep them at bay for a month or so, you are poring it down a rat hole. In other words, you lose it.

In reality, you want to take a good, hard look at why you want the money before you get into a 401k because that is your retirement money, what you will be living on in the future. Hey, 10,000 bucks now could be nearly a hundred thousand years from now. Too many people are looking for the fix now but do not see what will happen if that money is no longer there years from now when the retirement paycheck isn’t all that. You need to protect your future now…either way. Take a good look and if it seems right, then do it. If not, find another fix.